Is Yahoo deal set up for failure?

Outcome irrelevant, analysts say, because Google's model leads

April 11, 2008|By Eric Benderoff, TRIBUNE REPORTER

In its efforts to stay out of Microsoft's grasp, Yahoo is now in "serious" talks to acquire AOL. Yet the Internet is changing so quickly that some wonder if doubling down on an aging Web media model is the way to go.

Internet trends have shifted, and some analysts say the likes of Yahoo, AOL and Microsoft's MSN are no longer vital. Instead, they see the Web as transforming into a place where content is distributed to those who want it: Think of the school PTA Web site, for example, where a calendar from Google can be embedded into the page for any user to access.

This shift is coming at a time when Microsoft Corp. is aggressively seeking to bolster its online presence by acquiring Yahoo in a deal originally valued at $44.6 billion. Microsoft, meanwhile, is reportedly in discussions with Rupert Murdoch's News Corp., owner of MySpace.com, to join its bid for Yahoo.

Yahoo's chief executive, Jerry Yang, doesn't want to be acquired and is looking to Time-Warner's AOL for help.

"But does that change the direction of the Web at all?" asked Brian Bolan, an analyst at Chicago's Jackson Securities who follows major tech companies. "Putting some blocks next to other blocks, does that it make a new bridge? Putting these companies together doesn't really solve anything.

"When the venture capitalists get together to discuss a new company, they ask to see what problem it solves," he said. "The only thing this solves is that Jerry Yang really doesn't want to be a Microsoft employee."

Bolan still thinks Microsoft will end up with Yahoo, but because the Internet is changing so rapidly he sees it lagging Google significantly.

Microsoft, third in search advertising, wants second-place Yahoo to better compete against Google, the runaway leader in search-based advertising. But Google's structure is the one some analysts think best matches the future of the Internet.

"Google doesn't want to own content," said Jeff Jarvis, a media analyst who writes the BuzzMachine blog. "They want to be a platform for everyone to use."

This week's announcement between Google and the Chicago Transit Authority is one example of this philosophy: For trip planning purposes, Google allows the CTA, for free, to tap into its database of maps and images to create a more vibrant and rich guide to get around Chicago.

Google will pay the CTA to advertise the new trip planner on buses and trains. But more important, Google's ad network will be part of the system. If you want to use the CTA to get from Bucktown to Wrigley Field and stop for pizza along the way, Google will provide the restaurant locations.

'Microsoft has failed'

"Microsoft should look at itself as a platform, it has the ability to do that," Jarvis said. "It's better to give the content away and sell ads."

Microsoft's pursuit of Yahoo to bolster its ad offerings, reflects "at a high level that Microsoft has failed," said Marc Benioff, chief executive for Salesforce.com, the San Francisco firm that pioneered the software-as-services business. "Microsoft has over-relied on their control of software on the machine. They have not innovated.

"Google has shown Microsoft how vulnerable it has become," he said. "Their only weapon left is cash."

Yahoo, meanwhile, is doing all it can to thwart Microsoft's overtures. One deal being discussed would see AOL folded into Yahoo. Time Warner, AOL's parent, would also make a cash investment and then own about 20 percent of the combined company. Yahoo would use the cash to buy back its own stock in an effort to boost its share price.

A person close to the situation confirmed this scenario Thursday and called talks "serious." Whether a deal could be consummated and, more importantly, whether it would be enough to rebuff Microsoft remain unclear.

Bolan called a combined AOL and Yahoo "crazy. They are talking about valuing AOL between $10 billion and $12 billion dollars. I can't come up with a model to get that big of a number. AOL's instant messaging service is the only redeeming factor I can think of."

Motives questioned

But Bolan called Microsoft's interest in bringing News Corp. to the talks, which could not be confirmed, as "very cagey."

"I would imagine Microsoft would like to learn a lot from News Corp. about how well MySpace is really doing," he said, "and under the guise of this deal, I'm sure they can get some of that information. I would say it's a savvy move.

"But I don't see a deal other than Microsoft for Yahoo, where this started."

The person close to the talks called the reports of a joint Microsoft-News Corp. discussion "inaccurate." Neither Microsoft nor News Corp. would comment.

No matter who ends up with Yahoo, "the people involved are not innovators," he said. "They are followers. This is not a deal about the future of the Internet. It's about the problems of not executing in the past against Google."